Judge Puts Pensions on Table in Detroit Bankruptcy Ruling

By: Josh Sidorowicz Email
By: Josh Sidorowicz Email

A judge ruled Tuesday federal bankruptcy laws trump the state's constitutional protections of public worker pensions in the case of Detroit's bankruptcy.

It's a move that has left thousands of Detroit retirees wondering what will be left of their pensions and more more across the state wondering the same thing as more and more municipalities struggle with their finances.

"It's just not fair to those people who are counting on that money to maintain a certain standard of living," said Mark Hornbeck, associate state director of communications for AARP Michigan.

"The situation in Detroit could be repeated elsewhere and who knows where at this stage."

Hornbeck said the AARP is reviewing Tuesday's ruling to determine future legal involvement.

While Detroit pensioners have had the financial rug pulled out from under them, Fred Schaard, president of Rehmann Financial in Lansing said pensioners in other municipalities shouldn't panic just yet.

"Most cities do have unpaid debt obligations to their pension plans, but with the rebound in the stock market over the last four or five years, with some changes to the new pensioners that are entering, they've managed to at least curtail the growth of the unbalanced debt," Schaard said.

Schaard, who has more than 30 years of experience in retirement and financial planning, said Tuesday's ruling does have the potential to create precedent in other cities on the brink of bankruptcy.

But there are ways to protect your retirement.

Instead of sticking with the traditional defined pension plan, Schaard recommends either shifting to a defined contribution plan--like a 401k--or splitting between spouses, with one having a defined pension and the other, a 401k plan.

"Don't put all your eggs in one basket," he said. "So that you know the asset is yours to take but the asset is always there."

A handful of states, including Michigan, have also taken this sort of hybrid approach with pensions by spreading the investment risk out by shifting some of it instead on the workers.

In a statement Tuesday afternoon, while Michigan Attorney General Bill Schuette applauded the ruling to allow bankruptcy, he expressed disappointment in the decision to not keep pensions protected.

"I will continue to aggressively defend pensions and... the Michigan Constitution as this case proceeds," Schuette said in the statement.

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